explain and analyse the different methods of market modification required to correct market failure tradable permits or direct state provision and regulation

Question 1

Tradable Permits

Answer 1

• a market-based approach allowing government to limit negative externalities
• there is a limit/cap on the amount of pollutant emitted

With permits, a firm can then buy and sell these permits in an open market:

• if a firm wanted emit more pollution –> it could buy more permits
• if it reduced its pollution emissions, it can sell surplus permits on the market
• creates incentives for firms to produce less pollutions –> the buyer is paying a charge for polluting –> the seller is being rewarded for having reduced emissions –> outcome is more efficient

Question 2

Direct Regulation

Answer 2

• government-imposed standards, targets, process requirements, or outright bans
• government may make it illegal for a company to dump certain chemicals in a river –> hopes to protect third parties that use the river who would suffer a negative impact